New government fund for NBFCs will have limited impact: Analysts

Analysts said the short duration of the debt and rating restriction raises a question over its effectiveness.

Mumbai: The government has announced that it will guarantee a new Rs 30,000 crore fund to provide liquidity support to non banking finance companies (NBFCs).

However, this facility will be available only for investment grade paper of the short term three month maturity limiting its impact, analysts said.

The fund would be managed by a public sector bank though a special purpose vehicle (SPV) which will raise money by selling securities to the RBI.

This money will be used to buy short term debt maturing in three months from NBFCs. In case of any defaults the SPV will be covered by a government guarantee.

However, only investment grade debt would be purchased by this SPV restricting its reach to NBFCs.

Analysts said the short duration of the debt and rating restriction raises a question mark over its effectiveness.

"Technically an investment grade NBFC can raise fresh funds through a three month CP if it is facing a cash crunch. But its difficult to fathom that such highly rated companies will face a short term liquidity issue," said Karthik Srinivasan, group head, financial sector ratings at ICRA.

Banks investing in this paper are protected from default from the government but are also assured of funds through the RBI. The department of financial services will issue detailed guidelines soon.

"The proposed scheme would be a one-stop arrangement between the SPV and the NBFCs without having to liquidate their current asset portfolio.... The SPV would issue securities as per requirement subject to the total amount of securities outstanding not exceeding Rs. 30,000 crore to be extended by the amount required as per the need," the government said.

Bankers expressed doubt on whether the scheme will be used by those who need it.

"This three month tenure defeats the whole purpose of the government giving a guarantee. Liquidity is required but more on the longer end and by NBFCs below investment grade. This scheme does not address the problems of the sector in any way," said a banker involved in restructuring schemes for NBFCs.

The initial direct financial implication for the government is just Rs 5 crore, which is its equity contribution to the SPV. The financial implication for the government comes only after the guarantee involved is invoked.

However, on invocation, the extent of government liability would be equal to the amount of default subject to the guarantee ceiling which is Rs 30,000 crore.